Yahoo's Yang in hot water

Angry shareholders may try to oust the CEO after sale talks with Microsoft fizzle.

SAN FRANCISCO — Yahoo Inc. shareholders are so mad about the company's failure to cut a deal with Microsoft Corp. that several said they would consider a proxy fight to oust Chief Executive Jerry Yang and Yahoo's board of directors if that would bring the Seattle suitor back to the table.

An opposing board slate would get "overwhelming" support from shareholders, said Larry Haverty, portfolio manager with Gamco Investors Inc., whose funds own 1.2 million shares apiece in Yahoo and Microsoft.

But time is not on their side. In an apparent effort to blunt the shareholder firestorm, Yahoo on Monday set its annual meeting for July 3, giving investors little time to nominate a slate. The Sunnyvale, Calif., company in March postponed the meeting after Microsoft threatened to go hostile with its takeover bid.

"People have talked about it, but nobody I know of has actually committed to doing it," one major shareholder said. "It's daunting to pull it off in such a limited amount of time. And you don't know if Microsoft will be there."

On Tuesday, several large Yahoo shareholders burned up the phone lines in a campaign to persuade Yahoo's independent board members to reconsider Microsoft's offer. They also made overtures to Microsoft, which withdrew its sweetened $47.5-billion offer over the weekend.

After the three-month standoff with Yahoo, Microsoft has said that it plans to explore other ways to boost its Internet business. "Microsoft is moving on," a spokesman said.

The two companies differ in their accounts of last weekend's negotiations. Microsoft said it offered $33 a share and that Yahoo insisted on $37. Yahoo says it was receptive to selling to Microsoft.

Shareholders are especially indignant that the board dispatched Yang and co-founder David Filo, who they believe opposed selling the company, to negotiate with Microsoft. A member of Yahoo's senior management pointed out Monday that Yang was the CEO and that both were large shareholders.

Yahoo shares rebounded nearly 6% on Tuesday as investors anticipated that the company might give in to pressure to sell. Shares slid 15% on Monday to $24.37 on a volume of more than 279 million shares, prompting some to speculate that activist investors were buying up shares.

"I don't think they are going to get back on track any time soon and, if they do, it will be at a substantially lower price," said Jackson Securities analyst Brian Bolan, who downgraded Yahoo to "sell" after the Microsoft talks collapsed.

Yahoo Chairman Roy Bostock and Yang have defended their handling of the Microsoft negotiations. Yang says Yahoo has emerged from the takeover attempt a stronger, more focused company.

Yahoo is close to sealing an advertising partnership with Google Inc. to outsource some of its search business, is in merger talks with Time Warner Inc.'s AOL unit and is exploring other options, according to people familiar with the matter.

But increasing revenue and raising the share price will be a challenge in a weak economy. Haverty, for one, doesn't put much stock in management's three-year financial forecast or its plan to give up some of its search business to Google.